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Oil Outlook for March 17-21

March 16, 2014

Oil prices (WTI and Brent) changed course and dropped during last week. WTI oil fell by 3.6%; Brent oil, by 0.40%. As a result, the difference of Brent oil over WTI widened: The premium ranged between $6.96 and $10.03. Last week, the EIA’s weekly report showed a modest fall in oil’s stockpiles of 1.5 million barrels. OPEC’s oil report showed a rise in OPEC’s production during February. IEA monthly update presented a rise in global oil supply. Will oil bounce back? This week, several reports may affect oil prices. These items include: U.S industrial production, Philly fed index, FOMC meeting, and EIA oil weekly update.

Here is a weekly outlook for the oil market for March 17th to 21st:

Oil Prices – March Overview

During last week, crude oil price (WTI) fell by 3.6% and reached by Friday $98.89/b; further, Brent oil slipped by 0.4% to $108.57/b;

In the chart below are the daily shifts in WTI and Brent oil prices during the past several months (prices are normalized to December 31st, 2013). As you can see, Brent and WTI oil prices changed course and dropped in the past several days.

Premium of Brent over WTI – March

The gap between Brent and WTI oilsharply widened last week as it ranged between $6.96 and $10.03 per barrel. During the week, the premium rose by $3.26 per barrel.

Oil Stockpiles, Demand and Supply

The oil stockpiles fell by 1.5 MB and reached 1,729.26 million barrels. The linear correlation between the shifts in stockpiles has remained stable at -0.209: this correlation implies that oil price, assuming all things equal, may rise next week. But in order to better analyze the fundamentals let’s examine the changes in supply and demand:

Supply: Oil imports decreased by 2.1% last week. On the other hand, oil production inched up by 0.2%; the total supply fell by 0.9%;

Demand: Refinery inputs slipped by 0.4% last week. In total, the demand was still lower than the supply, and the difference between supply and demand narrowed. This shift may eventually pull up oil prices as the U.S oil market is moderately tighter than it was last week.

The chart below presents the changes in the gap between supply and demand and the price of oil.

If U.S oil market tightens further, this could pull up oil price.

The next weekly report will be released on Wednesday, March 19th and will pertain to the week ending on March 14th.

OPEC’s production rose last month

The OPEC report was released last week and showed a modest rise in OPEC’s oil production in February: OPEC’s production during February reached 30.115 million bbl/d – a 258 thousand bbl/d gain. This rise in production is mostly due to Iraq’s sharp rise in production from 2,997 thousand bbl/d to 3,397 thousand bbl/d – a 400 thousand bbl/d gain. Conversely, Libya’s output dropped to 334 thousand bbl/d – a quarter of its capacity. The production of Saudi Arabia also declined by 101.9 thousand bbl/d during February. If OPEC’s oil production further increases, this could continue to pull down oil prices mainly Brent oil.

Monday –U.S Industrial Production: This report will show the monthly shifts in the U.S industrial production during February; as of January, the production inched down by 0.3%; this report may affect the US dollar;

Wednesday – FOMC Meeting and Press Conference: The highly anticipated second FOMC meeting for this year will take place between March 17th and 18th. The FOMC will decide whether it will taper again QE3 and whether it will announce of any changes to its future monetary policy, i.e. the timing of when to raise its cash rate. If the Fed tapers again QE3, it is might pull up USD and pressure down (for a short period) commodities prices;

Thursday – Philly Fed Manufacturing Index: This monthly survey projects the growth of the US manufacturing sectors. In the last survey regarding March, the growth rate dropped from +9.4 in January to -6.3 in February (the recent Philly Fed review);

Oil Forecast and Breakdown

From the supply side, the sharp fall in imports and modest rise in production resulted in a decline in the oil supply. From the demand side, refinery inputs slightly fell. Further, the storage slightly declined. In total, the supply was still higher than demand but the gap between the two narrowed. This could suggest the oil market is still loose but has slightly tightened. The recent rise in OPEC’s oil output and the total global oil supply is likely to reduce the price of oil. Looking forward, the upcoming reports regarding U.S could offer some insight regarding the progress in the demand for oil. The gap between Brent and WTI ranged between $6 and $9. The looser oil market in the U.S may further widen the gap between WTI and Brent oil.

The bottom line, on a weekly scale, Oil might bounce back and rally in the near future; the gap between WTI and Brent may slightly widen.